Discussion
To maintain price leadership, a dominant firm must ensure that ...................... .
Answer: A
The key's answer is that the small firms do not produce more or less than the level agreed upon in the market-sharing agreement.
In price leadership, the leader sets the price and the other firms follow it. The arrangement holds only if the followers also keep to the output shares implied by that price. If they produced more than their share, the leader could not sell its own planned output at the price it set, and if they produced less the agreed market split would break down. So the leader must be able to rely on the followers sticking to their agreed quantities.
The other options are not conditions of price leadership: the leader's own price defines the market price, and product quality or innovation by small firms are separate matters.
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